American reliance on imported oil began during the Vietnam War and the economic boom period of the 1950s and 1960s.

In turn, this provided Arab countries and OPEC (formed in 1960 to counter Western oil companies) with increased power to control oil prices.

In the 1970s the pendulum of pricing power swung firmly in OPEC’s favour.

The US reacted to counter this.

Over the next few decades, American military activity in the Middle East ‘coincidentally’ ramped up. Alliances shifted in the region like desert sands. And America was at the centre of it all.

For the whole of the 1980s Saddam was actually friendly with the US. But he got too big for his boots. And his invasion of oil and gas rich Kuwait would threaten the US allies in the region including the biggest oil producing nation on the planet, Saudi Arabia.

So, we had the first Gulf war. And the second under George Bush Junior in 2003 supposedly over weapon of mass destruction (WMDs). The WMDs turned out to be phantoms. That didn’t matter, it was really about oil once more.

Control over oil — along with the US dollar and military strength — are central planks of US global power.

Which brings me finally to the recent Trump-Putin Helsinki Summit…

Guess who the second biggest exporter of oil in the world today is?

Russia.

This is one reason for Trump’s move toward Russia and away from China.

In Trump’s mind, one has something Trump wants, the other is getting richer off American debt and know-how.

The USA owes China a lot of money.

As of May 2018, total debt owed to China was US$1.18 trillion. That’s around 20% of total US debt owed to foreign countries.

Through the trade deficit, the Chinese grow wealthier every year thanks to the American consumer and their burgeoning debt.

Russia on the other hand has the means to keep the oil pumps flowing. And to keep the key producers in the Middle East pumping too. This is the strategic reason for Russia’s military deployment in Syria.

In my opinion, Trump prefers an alliance of military strength with Russia to control the flow of oil while he tries to renegotiate the terms of trade with China.

That way cheap oil keeps the US consumer happy as well as business costs low.

Check out this table…

1. Saudi Arabia: US$133.6 billion

2. Russia: $93.3 billion

3. Iraq: $61.5 billion

4. United Arab Emirates: $48.8 billion

5. Canada: $41.2 billion

6. Iran: $40.1 billion

7. Kuwait: $38.2 billion

8. Nigeria: $33 billion

9. Angola: $30.5 billion

10. Kazakhstan: $26.6 billion

11. Norway: $25.2 billion

12. Venezuela: $23.1 billion

13. Mexico: $19.9 billion

14. Libya: $15.7 billion

15. Qatar: $15.6 billion

Source: worldstopexports.com

The US has few friends on this list. But with Russia onside, the dynamics look a lot better.

A whole new ball game

This brings me to Trump and Europe.

Europe is a big net importer of energy. And in the past, they’ve been able to ride the coattails of US foreign policy here without too much worry.

US control of oil has benefited Europe too. And with American forces keeping Russia at bay to the east they’ve had it pretty sweet.

There’s definitely some merit in Trump’s arguments about Europe taking advantage of the US, no matter how crudely he puts it.

Trump’s play with Russia is to secure oil supplies and keep prices down.

He knows this will benefit Europe too. But this time he wants some protection money. And as he pointed out, Europe already relies on Russia for gas so he wants Europe to increase its spending on the military to 2% of GDP.

It’s the price of his peace so to speak.

Europe has two choices now.

Do as they’re told and spend more money on defence in the hope that the energy markets remain open and cheap into the future.

Or, change their energy strategy. Not ramping up military spending seems like a bad move now, no matter what happens next.

I think European policy makers now realise they can’t rely on benevolent US power anymore.

A German official said Trump’s deference to Putin was ‘frightening,’ and yet another example of why Germans — for the first time since 1948 — see the need for a ‘US strategy,’ which treats Washington as a potential adversary.

‘The thinking now is Europe needs to close ranks now to address US threats,’ the official said.

This means a radical re-think of energy policy. As well as a re-think of defence policy.

In the short-term, Trump will get his wish.

European countries will no doubt increase spending on the military.

This throws open investment opportunities for you in big US companies such as Northrop Grumman [NYSE:NOC] and Raytheon [NYSE:RTN] or potentially European companies such as BAE Systems [NASDAQOTH:BAESY].

Over the longer term though, the huge reliance on imported oil and gas into the EU is a severe strategic weakness that they will now need to deal with.

Renewables and nuclear power may be the industries to benefit from this strategic shift.

Ryan Dinse is an analyst at Markets and Money.
He has two decades of experience in financial planning, equity analysis and credit markets.
Ryan combines fundamental, technical and economic analysis to identify and invest in good ideas at the appropriate stage of the economic cycle.
He has a strong interest in technology, economic history and disruptive business models.
His focus at the moment is as lead analyst on two of our most recent and innovative investor services, Crash Market Investor and Sam Volkering’s Secret Crypto Network.
He will write about the exciting opportunities for investors to benefit from significant changes in world markets.
He is a member of Fintech Australia, a former member of the Digital Currency Council, and is a fully accredited financial adviser.

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